DCIT, CHENNAI vs. M/S. TIRUNELVELI VAYU ENERGY GENERATION PVT. LTD., CHENNAI

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

Both the appeals of the assessee and Revenue are directed against the very same order of the Commissioner of Income Tax (Appeals)-15, Chennai, dated 10.03.2016 and pertain to

assessment year 2010-11.

No.1961/Mds/2016.

distribution of gifts to local people.

expected to assist M/s PPN Power Generating Company Pvt. Ltd. in dealing with various statutory and non-statutory bodies. The assessee was also expected to negotiate with local people for

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ensuring smooth operation of the plant in the locality. According to

the Ld. representative, the assessee claimed before the Assessing

Officer that in order to maintain good relation with local people, the assessee has distributed gifts to the extent of `50,14,353/-.

According to the Ld. representative, it is absolutely required for the

assessee to maintain good relation with local people so that the

agreement with M/s PPN Power Generating Company Pvt. Ltd. can

be carried out without any hindrance.

page 2 of the paper-book, the Ld. representative for the assessee

submitted that unless the assessee gives some gifts to the local

people, it may not be able to liaison properly and effectively so as to

ensure that the plant of M/s PPN Power Generating Company Pvt.

Ltd. is operating without any problem from local people. According

to the Ld. representative, even though there was prohibition in the

agreement for giving gift, loan, etc. to Government officials and

political parties or the officers of the company or potential customers

of the company, there was no prohibition for giving gift or loan to the

local people who are not connected with either the assessee or M/s

PPN Power Generating Company Pvt. Ltd. In the absence of any

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agreement prohibiting the assessee from giving gift to the local

people, according to the Ld. representative, giving such gifts cannot

be considered to be non-business purpose. The very business of

the assessee is to liaison with local people. No doubt, there was

prohibition in giving gifts to statutory and non-statutory authorities,

however, there was no prohibition in giving such gifts to local people

who are not connected either with the assessee or with M/s PPN

Power Generating Company Pvt. Ltd. Therefore, according to the

Ld. representative, the gifts given by the assessee is for the

purpose of maintaining good relation with local people for smooth

function of the plant and it has to be allowed as revenue

expenditure.

Representative, submitted that during the course of assessment

proceeding, the Assessing Officer found that the assessee claimed

purchase of paintings, sarees CD TV iron box, mobile phones, etc.

which were given as gifts. On a query from the Assessing Officer,

the assessee explained that to facilitate smooth functioning of plant

in the village, it was necessary to maintain cordial relation with local

people. Therefore, the assessee presented paintings, LCD TV,

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sarees, fitness machine, DVD player, iron box, etc. According to

the Ld. D.R., the agreement with M/s PPN Power Generating

Company Pvt. Ltd. clearly prohibits the assessee from offering gifts,

loan to any Government official or any member of the political party

or any person connected with the company, therefore, giving gift is

totally prohibited as per this agreement. The assessee now claims

that giving gift to the local people is not prohibited. As per the

agreement, there was prohibition for giving gifts to any Government

official whether in statutory or non-statutory bodies and employees

of the company and to the potential customers. Therefore, the

assessee cannot now claim that gift given to the local people is for

the purpose of business. The Ld. D.R. further submitted that the

assessee has not produced details of the gifts given to the local

people, therefore, the Assessing Officer could not verify whether the

gifts were, in fact, given to the local people. Therefore, according to

the Ld. D.R., the CIT(Appeals) has rightly confirmed the addition

made by the Assessing Officer.

perused the relevant material available on record. The assessee appears to have purchased gift articles to the extent of `50,14,353/-

6 I.T.A. No.1961/Mds/16 I.T.A. No.2647/Mds/16

The assessee claims that sarees, fitness machine, DVD player, iron

box were purchased and gifted to the local people so that M/s PPN

Power Generating Company Pvt. Ltd. can operate its plant

peacefully in the locality. The facts remains that the no material is

available on record either for purchase of the so-called gift articles

or for distribution of the same. In those circumstances, this Tribunal

is of the considered opinion that the assessee has to produce

necessary material for purchase of gift articles and distribution

before the Assessing Officer. Unless it is proved that materials

were purchased and distributed to the local people for the purpose

of maintaining good relationship, the claim of the assessee cannot

be allowed. Therefore, this Tribunal is of the considered opinion

that the matter needs to be re-examined by the Assessing Officer.

Accordingly the orders of the lower authorities are set aside and the disallowance of `50,14,353/- is remitted back to the file of the

Assessing Officer. The Assessing Officer shall re-examine the

matter afresh on the basis of the material that may be filed by the

assessee and thereafter decide the issue afresh in accordance with

law, after giving a reasonable opportunity to the assessee.

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made by the Assessing Officer under Section 40(a)(ia) of the

Income-tax Act, 1961 (in short 'the Act').

for the assessee and Sh. P. Radhakrishnan, the Ld. Departmental

Representative. The CIT(Appeals) confirmed the disallowance

under Section 40(a)(ia) of the Act by following the judgment of

Calcutta High Court in CIT v. Crescent Export Syndicate (2013) 216

Taxman 258, holding that Section 40(a)(ia) is applicable not only to

the amount paid but also remains to be paid. Now the contention of

the assessee before this Tribunal is that the decision of Special

Bench of this Tribunal in Merilyn Shipping and Transport v. ACIT in

136 ITD 23 was confirmed by Allahabad High Court in Vector

Shipping Services (P) Ltd. (2013) 357 ITR 642. It is also an

admitted fact that Apex Court recently held that Section 40(a)(ia) is

applicable not only to the amount paid but also the amount remains

to be paid. In fact, the Apex Court upheld the judgment of Calcutta

High Court in Crescent Export Syndicate (supra). In view of the

above, this Tribunal do not find any reason to interfere with the

order of the lower authority and accordingly the same is confirmed.

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hotel accommodation.

submitted that these expenditures were incurred for exploring a new

business and the Assessing Officer has made addition arbitrarily.

Representative, submitted that the assessee debited an amount of `10.62 lakhs under the head “Travelling Expenses”. On perusal of

the details produced by the assessee, the Assessing Officer found

that the payment was made to five star hotels like Park Hotels. The

remaining balance amount was incurred towards air travel.

According to the Ld. D.R., the assessee was carrying on the

business of liaisoning service for M/s PPN Power Generating

Company Pvt. Ltd. As per the agreement, according to the Ld.

D.R., the assessee was expected to do liaison work with statutory

and non-statutory authorities. In this case, the travel was

undertaken by outsiders whose expenditure was booked by the

assessee as expenditure. According to the Ld. D.R., exploration of

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new business is not the business of the assessee. The business of

the assessee is only to do liaison work, therefore, the Assessing

Officer has rightly allowed the cost of the employees travel to the extent of `15,450/- and the balance of `10,46,815/- was disallowed.

perused the relevant material available on record. The business of

the assessee is to do liaison with statutory and non-statutory

authorities for the purpose of smooth functioning of the plant put up

by M/s PPN Power Generating Company Pvt. Ltd. The assessee

claims that payment was made to star hotels like Park Hotels. It is

not known why the payment was made to star hotels when the

assessee was expected to do liaison work in the area where the

plant was situated. Probably, the assessee or its employees may

have to meet the Government officials for getting the required

permission or license to carry on the business activity. The details

of the persons who stayed in the hotels are not available on record.

It is also not known the purpose for which they stayed in star hotels.

In the absence of any details, this Tribunal is of the considered

opinion that the assessee has to produce the details of the persons

who stayed in hotels and the details of the persons who travelled by

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air, to the Assessing Officer. Accordingly, giving one more

opportunity to the assessee may not prejudice the interest of the

Revenue. Therefore, the orders of both the lower authorities are set aside and the issue of disallowance of `10,46,815/- is remitted back

to the Assessing Officer. The Assessing Officer shall re-examine

the issue afresh in the light of the material that may be filed by the

assessee and thereafter decide the issue in accordance with law,

after giving a reasonable opportunity to the assessee.

film, to spread awareness among the local people.

account of advertisement film on which tax was not deducted.

Therefore, the Assessing Officer disallowed the claim of the

assessee under Section 40(a)(ia) of the Act. According to the Ld.

representative, it is not a case of non-deduction of tax. The

assessee deducted tax at the rate of 2% instead of 5%. Therefore,

according to the Ld. representative, it is a case of short deduction,

hence, Section 40(a)(ia) of the Act is not applicable at all.

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Ld. D.R. submitted that the assessee has deducted tax at 2% on the

payment made to M/s V.V. Communications for making

advertisement film. According to the Ld. D.R., under Section 194J

of the Act, tax has to be deducted at the rate of 5%, therefore, the

Assessing Officer has rightly disallowed the claim of the assessee

under Section 40(a)(ia) of the Act.

perused the relevant material available on record. Section 40(a)(ia)

of the Act makes it clear that whenever the assessee has to deduct

tax, the same has to be deducted at the time of making payment or

giving credit. If there is a failure to deduct tax, then the expenditure

cannot be allowed as deduction. In this case, it is not a case of

non-deduction of tax. It is a case of short deduction. The assessee

deducted 2% as TDS instead of 5%. Therefore, this Tribunal is of

the considered opinion that the provisions of Section 40(a)(ia) of the

Act may not be applicable in respect of short deduction. At the best,

the Assessing Officer may disallow the proportionate amount to

which tax was not deducted. Since this Tribunal is of the

considered opinion that Section 40(a)(ia) of the Act cannot be made

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applicable when there was short deduction of tax, there cannot be

any disallowance under Section 40(a)(ia) of the Act. Accordingly,

the orders of the lower authorities are set aside. The addition made

by the Assessing Officer is deleted.

submitted that the assessee had disclosed working in progress of `40.56 lakhs. The assessee has also disclosed `62.50 lakhs and

`95.10 lakhs as advances towards expenditure. According to the

Ld. representative, the assessee has incurred `40.56 lakhs for

renovation of building of the Director which was also used as

registered office of the assessee-company. According to the Ld.

representative, the building was taken on lease by the company and

it was used as residence and also registered office of the assessee-

company. The Assessing Officer rejected the claim of the assessee

on the ground that borrowed funds were diverted for non-business

purpose. According to the Ld. representative, the funds were

borrowed for acquisition of wind energy generator and no borrowed

funds were diverted for non-business purpose. The interest-free

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loan available with the assessee alone utilised for making

advances. The Ld. representative further submitted that even if the

advances made by the assessee were not for business, there was

no debit to the Profit & Loss account, therefore, there cannot be any

addition on notional basis. The Assessing Officer failed to examine

the nature of advances given by the assessee. Therefore,

according to the Ld. representative, the disallowance made by the

Assessing Officer towards notional interest to the extent of `35,66,880/- is not justified.

Representative, submitted that the assessee advanced money for

the purpose of taking the building on lease which was used as

residence of the Director, therefore, the funds were diverted for non-

business purpose. Merely because the assessee claims that the

registered office of the company was also in the same place, it

cannot be accepted unless there is a documentary evidence to

show the same. On a query from the Bench, when the assessee

has not claimed the payment of interest by debiting the same to

Profit & Loss account, how the same can be disallowed? The Ld.

D.R. submitted that it has to be verified whether the assessee

14 I.T.A. No.1961/Mds/16 I.T.A. No.2647/Mds/16

debited the payment in Profit & Loss account and claimed the same

as expenditure.

perused the relevant material available on record. The payment of interest to the extent of `35,66,880/- was disallowed by the

Assessing Officer on the ground that the borrowed funds were

diverted to non-business purpose. The assessee now claims that

the same was not claimed as expenditure and it was also not

debited in the Profit & Loss account. This fact has to be verified.

Moreover, whether the building taken on lease was used as

registered company also needs to be verified. Since such factual

verification is required, this Tribunal is of the considered opinion that

the matter needs to be re- examined by the Assessing Officer.

Accordingly, the orders of the lower authorities are set aside and the issue of disallowance of `35,66,880/- is remitted back to the file of

the Assessing Officer. The Assessing Officer shall reconsider the

issue in the light of the material that may be filed by the assessee

and thereafter decide the issue afresh, in accordance with law, after

giving a reasonable opportunity to the assessee.

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submitted that the assessee has paid liaisoning service charges at

the rate of 6%. The Assessing Officer disallowed the payment of `49,33,541/- on the ground that the payment was made at the rate

of 3% in earlier years. According to the Ld. representative, the

payment of liaisoning service charges was not in dispute. Due to

escalation of cost, the assessee was forced to pay the service

charges at 6%, therefore, the Assessing Officer is not justified in

saying that payment was in excess. According to the Ld.

representative, the payment needs to be made as per market rate,

therefore, the Assessing Officer is not justified in disallowing the

claim of the assessee.

Representative, submitted that in the earlier years, the payment was

made at 3% and this year the assessee claims enhanced rate of

6%. In fact, the turnover of assessee was higher when compared to

earlier years. According to the Ld. D.R., the only reason adduced

by the assessee for increase in service charges was that the

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Director has spent more time. The Assessing Officer found that

since the payment was made in excess to the payment made in the

earlier years, according to the Ld. D.R., the same was disallowed.

perused the relevant material available on record. The payment of

service charges is not in dispute. The Assessing Officer found that

in earlier years, the service charges were paid only at the rate of

3%, therefore, the payment of service charges at 6% was

excessive. No doubt, the service charges have to be paid at market

rate. The assessee claims that due to escalation of charges, the

service charges have to be paid at increased cost. When the

assessee has paid service charges at the rate of market value, the

same cannot be disallowed by the Assessing Officer. In the earlier

years, similar service charges were paid to the Director at the rate

of 3%. The rates are increasing day by day and cost of service was

also increasing simultaneously. Therefore, the Assessing Officer

cannot place reliance on the rate paid in the earlier assessment

years. What is to be seen is whether the service was rendered by

the Director and whether the assessee has paid at 6%. It is not in

dispute that the Director has rendered service and payment was

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made to him at 6%. In view of the above, this Tribunal is of the

considered opinion that the Assessing Officer is not justified in

disallowing the claim of the assessee. Accordingly, the orders of the lower authorities are set aside and the addition of `49,33,541/-

is deleted.

Assessing Officer.

submitted that the Assessing Officer found that the assessee was

carrying on trading in shares on a large scale and on regular basis.

The assessee was maintaining trading account with M/s Aditya Birla

Money Ltd. According to the Ld. representative, during the year

under consideration, the assessee made transactions to the extent of `98.07 Crores in relation to more than 200 shares of different

companies. The assessee has not entered the transactions on day

by day basis in the books. The assessee is maintaining investment

portfolio also. Some of the investments were made in shares.

According to the Ld. representative, the shares wherein investments

were made has to be treated as capital gain on sale. However, the

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Assessing Officer has taken sale of shares as business income

instead of capital gain.

Representative, submitted that the assessee in fact invested in the

shares of more than 200 different companies. The assessee

singled out one company’s shares, namely, M/s Apollo Hospital

Enterprise Ltd. and claimed the same as investment. The profit on

sale of shares of M/s Apollo Hospital Enterprise Ltd. was claimed as

capital gain. According to the Ld. D.R., the Assessing Officer after

taking into consideration material available on record and

transactions of the assessee, found that it is only a business

transaction.

perused the relevant material available on record. It is not in

dispute that the assessee has invested in shares in more than 200

different companies. Other than M/s Apollo Hospital Enterprise Ltd.,

the assessee itself treated the profit on sale of shares as business

profit. In respect of investments in some of the companies, the

assessee claims as capital gain. Even though the assessee

systematically engaged in purchase and sale of shares, the

19 I.T.A. No.1961/Mds/16 I.T.A. No.2647/Mds/16

assessee can maintain two portfolios – one portfolio for business

and another one for investments. In order to find out whether the

assessee invested the funds in M/s Apollo Hospital Enterprise Ltd.

as a trader or for investment, the intention of the assessee at the

time of investment needs to be ascertained. When the law permits

the assessee to maintain two portfolios, one for investment and

another for business, this Tribunal is of the considered opinion that

the Assessing Officer has to ascertain the intention of the assessee

in investing money in the shares of M/s Apollo Hospital Enterprise

Ltd. Since the intention of the assessee was not ascertained and

brought on record, this Tribunal is of the considered opinion that the

matter needs to be reconsidered. Accordingly, the orders of the

lower authorities are set aside and the entire addition made by the

Assessing Officer is remitted back to the file of the Assessing

Officer. The Assessing Officer shall re-examine the matter afresh

after considering the material that may be filed by the assessee and

thereafter decide the same in accordance with law, after giving a

reasonable opportunity to the assessee.

No.2647/Mds/2016, the only issue arises for consideration is with

20 I.T.A. No.1961/Mds/16 I.T.A. No.2647/Mds/16

regard to disallowance made by the Assessing Officer under

Section 14A read with Rule 8D of the Income-tax Rules, 1962.

submitted that the Assessing Officer disallowed the expenditure for

earning exempt income by applying the provisions of Rule 8D.

However, the CIT(Appeals) allowed the claim of the assessee on

the ground that the disallowance cannot exceed the exempted

income. According to the Ld. D.R., Rule 8D does not say that the

assessee has to earn exempted income for the purpose of

disallowing the expenditure incurred. Irrespective of the income

earned by the assessee on the investments made, according to the

Ld. D.R., the disallowance has to be made by computing the

expenditure under Rule 8D. In other words, according to the Ld.

D.R., Section 14A of the Act does not depend upon any exempt

income earned by the assessee. Referring to Section 14A of the

Act, the Ld. D.R. submitted that the expenditure in relation to

income, which is not included in the total income, has to be

disallowed, therefore, the CIT(Appeals) is not justified in allowing

the claim of the assessee.

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for the assessee, submitted that the Madras High Court in

Redington (India) Ltd. v. Addl. CIT (2017) 77 taxmann.com 257

found that the disallowance cannot be made on notional basis.

According to the Ld. representative, when the assessee has not

earned any income on the investment made, there cannot be any

disallowance of the so-called expenditure. Therefore, if at all the

assessee has earned any income, it cannot exceed the income

earned by the assessee. Therefore, according to the Ld.

representative, the CIT(Appeals) by placing his reliance on the

judgment of Delhi High Court in Joint Investment Pvt. Ltd. v. CIT

(ITA No.117/2015), has rightly allowed the claim of the assessee.

perused the relevant material available on record. The

CIT(Appeals) found that the disallowance under Section 14A of the

Act cannot exceed the exempt income, by placing reliance on the

judgment of Delhi High Court in Joint Investment Pvt. Ltd. (supra).

The Madras High Court in the case of Redington (India) Ltd. (supra)

has taken a similar view. Therefore, this Tribunal do not find any

22 I.T.A. No.1961/Mds/16 I.T.A. No.2647/Mds/16

reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Order pronounced on 5th July, 2017 at Chennai.

sd/- sd/- (�ड.एस. सु�दर �संह) (एन.आर.एस. गणेशन) (D.S. Sunder Singh) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 5th July, 2017.

Kri.

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती/Assessee 2. Assessing Officer 3. आयकर आयु�त (अपील)/CIT(A)-15, Chennai-34 4. आयकर आयु�त/CIT-6, Chennai-34 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.